Why you Should Diversify Your Banks

    Bank closure is not something one hears about every day. After the 2008 financial crisis, the Fed has put robust guidelines and mandates to protect your money in the bank. When covid hit, some banks did get impacted.  Last week's closure of Silicon Valley Bank (SVB) is a good reminder to diversify your bank as well. If you don’t know what happened, SVB was closed last Friday when it ran out of cash due to panic withdrawal by its customers. SVB lost its equity cushion of $12 billion when customers attempted to withdraw $42 billion a day before. This resulted in the demise of a 40-year-old bank created for funding tech startups.

The Collapse

    Many of Silicon Valley Bank’s customers (including tech startups) and investors (VCs) had all of their savings tied up in the bank. When the bank collapsed, they were left with no access to their money and no way to pay their bills or cover their expenses. Many of these people had invested their savings in the bank's high-yield savings accounts, which promised high returns; however, this ended up coming with a higher level of risk. Unfortunately, when the bank collapsed, these investors lost all of their savings. Some of them were left with nothing, while others would be forced to sell their homes or liquidate other assets to cover their expenses.

Diversifying Accounts

    The lesson here is clear: diversify your bank accounts. The collapse of Silicon Valley Bank serves as a cautionary tale for anyone who puts all of their savings in one place. By diversifying your bank accounts, you can reduce the risk of losing all of your savings in the event of a bank failure or collapse. This doesn't mean you need to open a dozen different accounts at different banks, but having at least two or three accounts at different institutions can provide a level of protection. It's important to remember that no bank is completely immune to failure, so taking steps to protect your savings is always a smart move.